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Russian Central Bank: Impact of Sanctions Shows Russia Has an Open Economy

April 13, 2018

The Moscow City business district, Moscow, Russia, October 22, 2017.

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Russian Central Bank: Impact of Sanctions Shows Russia Has an Open Economy

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Elvira Nabiullina

Head of Russian Central Bank

“We all know that the Russian economy is an open economy, we have a large share of exports, many large export-oriented companies. Therefore, changes in external conditions cannot but affect the Russian economy.”

Numerous factors, not simply the absence of trade barriers, define an open economy.

Elvira Nabiullina, the head of Russia’s central bank, said on April 9 that the Russian economy would feel the impact of the latest U.S. sanctions on Russian officials and businesses because it is an open economy with significant exposure to global markets. She also said the central bank would be able, if necessary, to mitigate the sanctions’ effects on inflation.

Nabiullina’s comments came three days after the U.S. imposed sanctions on more than a dozen senior Russian officials, heads of state-controlled companies, and business tycoons with ties to the Russian government and Russian President Vladimir Putin.

The U.S. sanctions were in response to a series of Russia’s actions, ranging from the seizure of Ukraine’s Crimean Peninsula in 2014, alleged meddling in the 2016 U.S. presidential election, and the alleged poisoning of ex-double agent Sergei Skripal and his daughter in Britain last month.

U.S. Treasury Secretary Steven Mnuchin testifies on Russia and economic sanctions before the Senate Finance Committee on Capitol Hill in Washington, February 14, 2018.

The measures freeze the financial assets of the sanctioned entities on U.S. territory and prohibit U.S. individuals and groups from engaging in business transactions with them.

The mere announcement of the sanctions by the U.S. Treasury Department has created jitters in the Russian economy and in the financial markets, causing significant sell-offs of shares in the sanctioned companies and downward pressure on the Russian currency.

There are fears that, absent a calming of the market or effective counter-measures by the Russian government, inflation, currently running at about two to three percent, could reach double digits, as it did at the peak of the 2014-2015 financial crisis, which followed the collapse of global oil prices.

Russian Prime Minister Dmitry Medvedev leads a cabinet meeting, Moscow, Russia, April 9, 2018. Medvedev ordered his Cabinet to draw up measures to support the companies in the energy, metals and arms sectors that were sanctioned by the U.S. on April 6.

Nabiullina’s assessment of the impact of sanctions is therefore correct, as are her claims that Russia’s trade value is large relative to its overall economy and that its exporters are integrated into global markets. But her claim that Russia has an open economy is only partially true, resting solely on the absence of trade barriers while ignoring qualitative assessment criteria.

According to Anders Åslund, a Swedish economist and a Senior Fellow at the Atlantic Council, Russia’s foreign trade value was $591 billion out of the GDP of $1.4 trillion in 2017, and its tariffs are relatively low -- in the 7% range.

“Russia has hardly any quotas or other absolute non-tariff barriers,” he told Polygraph.info, noting that its tariffs are “far lower” than those of other BRICS economies and that, based on these measures, Russia’s economy is more open than that of the United States. The acronym BRICS stands for Brazil, Russia, India, China, and South Africa – large developing economies with the potential to rank among the most influential economies in the future.

The Heritage Foundation’s economic freedom index puts Russia’s trade at 46%, and assigns Russia a freedom score of 58.2, making its economy the 107th freest in the index. The score from the politically conservative U.S. organization falls below the regional and global average.

Meanwhile, according to the World Economic Forum’s Global Competitiveness Report, Russia’s competitiveness indicators have remained stable, moving up two places on the index to 43rd place thanks to improved scores on education, innovation, and overall business environment.

The WEF report noted, however, that Russia has yet “to close the gaps” in “innovation capacity and technological readiness.”

Russia has also not yet overcome major non-tariff barriers, including “sectoral restrictions,” “the prevalence of state-owned enterprises,” and a large number of public financial entities in the lending market, all of which are factors restricting private and foreign investment.

Experts say Russia is still transitioning from a centrally planned to a more market-based economy. But it faces serious obstacles due to “imperatives of political stability and government longevity,” as well as the public sector’s marginalization of the private sector.

“Large state-owned institutions and an inefficient public sector dominate the economy. The judiciary is vulnerable to corruption, and weak protection of property rights undermines prospects for optimal long-term economic development,” the Heritage Foundation report notes.

A 2015 policy brief published by the Petersen Institute for International Economics highlights the growing involvement of the state in the Russian economy under Putin, pointing to Russia’s use of extractive resources as a foreign policy tool and lagging structural reforms.